Brazil in the 1997-9 Financial Turmoil

Brazil in the 1997-9 Financial Turmoil

The fourth in a series of country-specific meetings of the NBER Project on
Exchange Rate Crises in Emerging Market Countries, directed by NBER President
Martin Feldstein and Research Associate Jeffrey A. Frankel, both of Harvard University,
took place in Cambridge on April 14 and 15. This gathering focused on "Brazil in the
1997-9 Financial Turmoil," and was organized by Eduardo Loyo of Harvard University
and Andres Velasco of NBER and New York University. Like earlier NBER meetings on
Mexico, Thailand, and Korea, this occasion brought together academics, individuals
representing the country, international bankers, and government officials in the hopes of
developing an in-depth understanding of Brazil's economic situation.

The two-day meeting was divided into four sessions. In Session 1, a panel
consisting of Edmar Bacha, BBA Securities, Gustavo Franco, PUC-Rio, and John
Williamson, Institute for International Economics, discussed the events leading up to the
crisis. They asked, for example: Was the cause of real appreciation and disinflation
actually inflation inertia or nominal appreciation? How does one choose a gradual
realignment strategy, as opposed to a prompt realignment, or a totally fixed exchange
rate? What are the costs of realigning slowly, both fiscal and in terms of activity? And,
what is the perceived benefit of gradual realignment in terms of avoiding a persistent
inflation backlash?

In Session 2, the experts discussed the way that the crisis was managed. The
panelists were: Luiz Correa do Lago, PUC-Rio; Peter Garber, Deutsche Bank; and
Thomas Glaessner, World Bank. This group focused on the following questions: Was
the 1998 impact on Brazil an example of pure contagion? Was the G-7 "playing for time"
and did it work? How exposed was Brazil to speculative attacks, compared to other
crisis countries? Did it stand a better chance of defending the peg with high interest
rates? What was the health of the financial system, the public debt problem at the time,
capital account freedom, and what was the "narrow exit door" argument? Would a firmer
commitment to a peg have avoided the devaluation? Did Brazil fold under overwhelming
external pressure or did it invite the attack with its indecisiveness? What have we
learned about the value of "preventive" rescue packages?

In Session 3, panelists Eliana Cardoso, the World Bank, Marcio Garcia, PUC-Rio, and Paulo Leme, Goldman Sachs & Co., considered what fiscal retrenchment
would have accomplished in Brazil. They asked such questions as: Was it all a fiscal
problem? How does fiscal retrenchment relate to domestic absorption, and to the
dynamics of public debt? Could fiscal retrenchment have avoided the devaluation? And,
how does public debt management proceed under external speculative pressure?

In the fourth session, Suman Bery of the World Bank, Ilan Goldfajn, PUC-Rio,
and Nouriel Roubini, NBER and the U.S. Department of Treasury, described the
devaluation and subsequent fallout. They asked: Why has pass-through been so small?
Why has the contractionary impact of the devaluation been so small? How fast could
interest rates be reduced? Was it worth defending the peg for so long? What would
have been the outcome of letting go earlier? And, what impact did the devaluation have
on the region?

In addition to these sessions, there was an off-the-record after-dinner
presentation by Arminio Fraga Neto, Governor of the Central Bank of Brazil.
A summary
of the other discussions is available.

Support

The research activities of the NBER are funded by grants from federal research agencies, by private foundations, and by generous donations from our corporate associates and from private individuals. The NBER is a non-profit, 501(c)(3) organization. For information on supporting the NBER, please contact: